Archive: Entrepreneurs

Recently I had the nice experience of being interviewed by the blogger / founder of http://www.easn.de or Everything A Startup Needs. He asked me to relate:

- how dw capital grew out of denkwerk

- what makes our positioning unique

- what are my criteria for investment

- and how much idealism a Founder can sustain

Of course, an [edited] video interview cannot convey all the things and remarkable people that shaped the rich history of 10 years of denkwerk, but maybe the interview gives anyone interested an impression of the philosophy behind our seed venture unit, dw capital. So, here goes:

In a recent discussion I had at a meeting of which I am a non-executive member, the eternal discussion of

whether priority should be given to monetization or to reach and internationalization

was brought up. The debate centered around the question of whether or not the exit perspectives of the venture (of which I am also a shareholder) would increase or decrease, depending on whether the business model was first proven, at the detriment of international reach, or whether monetization should be allowed to lag because entry into several international markets at once would be a priority.

To me, this debate simply has the wrong starting point. While it is true that exit markets, such as the stock market or the M&A market, are – just like any other market – subject to buyer preference analysis, and while there is some credit to the claim that understanding the decision making “fashions” of typical M&A acquirers does help you in setting the price of your venture at exit,

timing towards such an exit market is more of a gamble than a company strategy.

In my experience, having now gone through two boom and one bust phases, the best strategy for a company to pursue is to

create a viable business model that creates value for customers that customers are prepared to pay for.

This may not always be the “sexiest” portrayal a startup can give itself (as opposed to: we are the next Facebook), but to paraphrase the old saying about design following function or form following function-

PR and the Elevator Pitch should follow the strategy and not the other way around.

This is why I literally get angry at classic venture capital thinking that sees company strategy solely in the dimension of “How will this fit my exit market? How can I sell this story to an acquirer?”. I would always strongly advise any founder

to have a clear and separate vision of their business model that cannot be influenced or swayed, save by the customer

and to work relentlessly on proving and creating that.

Incidentally, succesful American start-ups have often proven that this is the best strategy since they have always focused on gaining size and growth in their home markets before over-focussing on internationalization. In general, this has given them the size and clout necessary to, if need be, acquire whoever it was in a landscape within a specific market. It is true, that this does not always work and that some local markets have been lost even for giants such as Yahoo! and E-bay because they haven’t gone local on time, but conversely there is no known example of a company that went for reach without a viable business model and survived.

Eventually, you do have to pay the bills.

So if you do have to reach several international markets at once (because you are in a European market with too small a home market or because your board is adamant or because you have that peculiar megalomania that most entrepreneurs – including me – indulge in, I would advise the following order or priorities in formulating your company strategy:

1) Define your Business Model

2) Prove it by acquiring your reference customer base

3) Identify the growth factors in your business model with respect to paying customers

4) Identify the multipliers or incumbents in other international markets

5) Internationalize on a sales / business model driven basis by acquiring reference paying customers in those markets

The perceptions of your target exit markets can change faster than you can change the positioning of your company.

But a functioning business model and a continuous revenue stream are two realities that a) always let your survive independently of your VC backing and b) always find an acquirer.

Where there is a business model, there always eventually is an exit market.

As the winter of discontent of content owners and YouTube begins, a certain rumbling is growing. If you look back at the first Blog posts describing the Web 2.0 phenomenon, they often called it an illusion, overrated or a bubble. Very often it is pointed out that while YouTube was sold for $1.6 Billion, it in effect only had $15 Million in revenue last year and now a host of other problems (if you count all litigation issues and tech issues, the costs of YouTube may well be above $1 Billion or so). That is assuming, of course, that Viacom and Co. will manage to convince the courts of their point of view.

However exaggerated this view may be – it has, on a fundamental level, one merit. The YouTube Business Model, as far as it is now established, is based on an unjust usage of copyright and the equity of copyright.

Now I would be the first proponent of the theory that the internet, as John Perry Barlow put it, is “the end of copyright”. In the sense that transmitting, copying and distributing knowledge and information has become so easy through the internet that an author who wants to earn the fruits of his labor is well advised to find new ways of establishing himself as a person and establishing derivative business models off the content he produces, rather than relying on licensing fees alone. Nevertheless, YouTube does not even give that to content producers and content owners. It is like a giant attention lottery, where the very few motivate the very many, through their success stories of 15 minute world fame, to copy their endeavour and try to achieve that kind of world wide recognition. However, who of those authors, even of those who have achieved that kind of short-lived fame, has actually managed to earn money off it?

That is why YouTube lacks the value chain one needs for a viable business model. That is not to say that YouTube did not achieve something very important. It created a platform for ubiquity of video content and facilitated the exchange, commenting and sharing of that kind of content. It taught users an important lesson- that broadcasting is not the prerogative of a few publishers. From there, to a viable business model is a different step.

Google may use the YouTube technology to create Google video ads and to create a platform for viral marketing (which actually may be a sound business from the position that Google has) but, anyone trying to copy the YouTube model must fail if he does not devise a value chain, a sound and profitable value argumentation, and defines what his market is.

In essence, the markets the emerging video platforms target is the advertising market or the market for sharing and licensing content- the latter being a very difficult one. The key to monetizing that kind of tool and achieving success in that kind of market will be to define the value chain and to make it track-able, so as to be able to calculate an operating margin and to devise ways of building a business.

None of the me too(s) and copycat models of YouTube has achieved that yet.

sevenload is one of the most exciting business ventures I have ever been a part of, by defining a value chain which, because of its self-reinforcing nature, we call the “value mill”. By devising a technology to track not only usage of content, but also the revenue generated by the individual video stream and by devising a way to create specific audiences that add a lot to the advertising value that a video can have, sevenload has in effect solved the 3 main problems of any video business model.

For now I don’t want to describe, in too much detail, what sevenload does as we still have to establish our market leadership. But stay tuned to see how the first viable video business model on the net will continue to be established.

After 15 years of entrepreneurship the realization I come back to more and more, and in these hyped times even more strongly, is that finding the right people is the one determining factor that will decide whether you will have success or not.

On the one hand that seems like a trivial statement and on the other implementing that realization is a continuous challenge. It starts of course, with a founding team – where anyone who has started up a company knows that what seems to be a perfect team at the phase of imagining the product/the service or wrapping up the prototype, may turn out in effect in the next 6 months not to be the right set of talents and personalities. However, the HR topic becomes even more relevant when you’re hiring your first 20 employees- often finding the right person can be very crucial, even in seemingly less decisive functions such as finance or organization, or even some parts of marketing.

In that critical phase where the company is not yet known, and it is hard to find people who are at all willing to work for the company, management often makes a compromise. In essence you may have no choice, but that compromise can be more costly than not hiring a person at all – and it is always much harder and much less fair to get rid of a person who is in the wrong position, perhaps without fault, than to make the necessary effort to take the right decision in the beginning.

I at least have made this mistake over and over again and I still do not feel much smarter. At the same time, having to go through the process of selection and de-selection of the right team can be very critical for the company culture as well, because issues of fairness and the relationship between the HR consequences and your own management mistakes becomes a predominant topic, especially if you have to let people go. This is all the more relevant because in the initial phases of a company, management is bound to make many mistakes, so the issue of fairness becomes even more dominant.

For employees to understand that the fact that management makes mistakes (and will as shareholding/entrepreneurial management, very probably not be ousted), and at the same time accept that co-workers who were hired on a risky job in a company with an uncertain future, are fired, makes it even more apparently unfair.

There are only 2 ways of avoiding that:

1) be as intransigent (if not more intransigent) with lacking performance on the entrepreneurial or the management’s part (start there). As we say in German “A stairway is always swept from the top”.

2) Secondly, make objectives clear, understandable, quantifiable, but also adjustable and communicate continuously around these objectives, so that the standard of performance is understandable for every employee. This also means that objectives have to relate to the company mission and to the overall goal in a way that every employee understands, shares, commits to and identifies with.

Hiring the right people and finding the right balance between clear objectives, clear leadership, strong enthusiasm and group identification is probably the hardest challenge in setting up a company – this is where companies fail, all other mistakes can often be corrected or adjusted, if need be with fresh capital, but once a company’s corporate culture or the mix of talents and resources is poisoned it’s very hard for a company to overcome that stage, and to then regain enthusiasm, regain momentum and catch up with a market that has probably moved on.

To put it simply, at the end of the day, every company is just a group of people trying to achieve something, set up their own rules and gain success. For that and for the entrepreneur endeavoring to achieve success there is no easy way out, there is no toolbox and there are no simple solutions. It is probably the area where he or she most needs to continuously revise (on a daily basis) what he or she is doing, by which principles and with which success. It is the prime area of self-improvement for an entrepreneur, alongside self-management.

After having gone underground with a series of negotiations, I’m back withe the facts and some insights:

- Sevenload (http://www.sevenload.com) got a Financing from Burda Digital Ventures, the venture subsidiary of Burda group, a leading German Media Group

- Oneview (http://www.oneview.com) got a financing from a leading Media group as well, but that is still somewhat in stealth mode.

This introduces an exciting new phase in both ventures. Sevenload has reached new highs in usage. While competitors benefit from integration in TV channels, tend to trick somewhat on their figures, and basically are positioned as “videos generate traffic, traffic generates advertising impressions, ad impressions generate revenue”, sevenload is going for the Long Tail of content, creating a series of specialised audiences and trying to create advertising value there.

We have negotiated for months on the financing deal with a series of Venture Capitalists and strategic investors. We opted for Burda because it gave us a combination of media competence on their part and independence to pursue our own entrepreneurial course.

We closed the deal more than three weeks ago but wanted to gain some time before communicating it. We had carefully crafted a press release – only to discover that an early talk and its misinterpretation has led, a day before the release, to the faulty and undesired headline that we had been acquired. While this certainly serves the purpose of strengthening the positioning of Burda as a digital innovation leader, it is important for us to stress that we remain entirely independent and this is a pure venture financing. Lesson learned: remain on top of any and all first contacts to the press and lock in the main media with exclusives.

The other surprise was that the news generated so much response. The video market remains a very hot spot.

These are exciting times indeed… Last week saw me (us) at DLD with a fascinating charge of speakers and attendees – and a historic moment.

Conference host Hubert Burda, Owner of Burda Group, one of Germany’s largest Media Houses, jumped up on stage and delivered a smashing and spontaneuous speech in praise of entrepreneurial creativity, citing “companies such as sevenload and Alexander Straub” that revolutionize markets.

I also noticed that denkwerk has great recognition as the factory of ideas that is its name-giving founding idea. Great recognition on that even from competitor Regine Haschka of ID-Media, and from Paulus Neef, Founder of Pixelpark. We shared war stories on Wildpark back in the 90s. I bonded with Christiane zu Salm, said Alexander Straub and Martin Varsavsky (once more) as well.

Highlights were also David de Rothschild, fiercely engaged in educating children to ecology, and James Murdoch, who portrayed some really smart strategies to neutralize CO2 emission at BSkyB and earn money at the same time. His key was the climate opportunity as opposed to the climate change.

I had the pleasure to be a speaker at an OpenBC Event in Brussels, on a panel with Eric Archembeau, serial entrepreneur turned VC. The tune I was to play was the answer of the Founder to the VCs – after ING and Eric described requirements for getting a funding. Well, here goes what I said (click on Image to run the presentation).

I have been musing about what a recently befriended VC told me about his firm investing in a few “Superfounders” every year, while discarding thousands of Business Plans. First I felt flattered, assuming of course to be meant. When i asked him how he recognized a Superfounder, he said: “well, you know one when you see one”. Aha.

There is of course a very valid point in that a VC Partner known to have invested in some of the great successes in their realm of action does have the experience to recognize success in the budding. But maybe that’s just the point, “when it is [already] budding”.

Picture this:

Niklas Zenström spent some three years being laughed at for Skypester before moving to an unlikely Baltic State to rename it Skype and get rich.

When we got to know the Sevenload team, by all classic criteria of the business and VC scene I know, there was no way their imminent (and yet to be brought to full fruition) success was discernible. But i felt:

- Passion
- Nonconformism
- A dedication to User Value
- Borderless thinking
- and the proven will to bite the bullet in the face of adversity
- very low bullshit factor
- and a keen sense for the value of every single €
- and the ambition to shoot for the moon (even if you miss it, you’ll land among the stars)

…all proven in the biography, especially of Ibrahim Evsan, the Key founder – and as i know see as an observer of http://www.codingnight.de

It’s either viral or another proof that A class people attract A class people, because the whole team shows that dedication. In the myths of our time, it’s the Googleyness of Sevenload.

Which brings me back to “What is a Superfounder?”. I’m not sure there isn’t a fat danger of having a kind of simplistic Belief in the Strong Man. Where I come from,

which we founded as the idea of “A Company of Brilliant People”, dedicated to the above, to innovation, to having the guts to start new things, it is TEAMS that created the greatest success. And Team means that secret combination of personalities, talents, and experiences, that combine to bring the spice and the reality to any Grand Idea. So if being a Superfounder means dreaming that dream and creating that kind of environment, then maybe yes, I do feel like a Superfounder, Ibo certainly is, and Bill Gates, who said success is never achieved alone, damn sure is. [wow, me and Bill in one sentence]

But maybe the lesson of the picture in this blog is different: it is the teams that matter. And the less loud, less salesmany, less obvious secret toilers, the Wozniaks, the Myhrvolds, the Substance Makers are the ones that really count at least as much. In one word:

Rumour has it VCs are downbeat again. Well, on the one hand I can’t blame them, and on the other it brings me back the structural problem of assessing innovation as an investor. I have been observing a very fashion-driven, impressionable and cyclical focus of VCs on The Things That Exit Well (TTTEW), coupled with a regularly disdainful disregard of Never Heard of That (NHoT) and Don’t Believe It Works (DBIW).

Interestingly, most acclaimed hot shots, like skype, or Social Bookmarking, or even Apple in the beginning, went through year-long phases of NHoT and DBIW before sparking real Oh God I Hope We’ll Get a Deal in That Space Epidemic (OGIHWGaDiTSE).

Now as a proponent of a few Startups That Earn Actual Money (STEAM) – I like to think of our company as having a STEAM-Engine, being STEAM-Driven, or believing in STEAM-Power, if that is not too much self-E-STEAM – I keep wondering why it is much harder for VCs to see the merits of Social Commerce models vs. simple Social Network models.

There is no logical explanation for this. And if you think of it, copying something that just exited well is about the stupidest thing you can do:

1. It has already been done
2. It has become big enough to just exit
3. It has become so big everybody actually knows about it
4. There are at least 100 other boy group founding teams and greedy-panicky Vijays (see Dilbert for who that is) funding them who are trying to do the latest GooTube thing

…doesn’t strike you as smart? It’s being done. All the time. Again. And it’s sooo 1990s, ain’t it?

Robert Shiller identified a number of reasons why this time around, exuberence is more rational than when he wrote his landmark “irrational exuberence”. In short:

- founders are smarter
- costs for it and marketing are lower
- market demand is 10x greater

I buy that. Totally. We’ve been saying it too B). The only thing that worries me is that the GooTube deal creates valuation hyperventilation – and building an organisation that actually sustains a business that is worth more than 9 digits is a cartload of LONG HARD WORK. Let nobody forget that.

The other interesting phenomenon is that bankers and consultants are flocking back to the troughs of get-reach-fast-with-dotcom-web2.0 – and they still often need to learn to go operative – Find the shortest distance between a powerpoint slide and the real world.